Still, the Crooks Be Winnin' 32 comments
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Fooling Some of the People All of theTime
by David Einhorn
John W. Wiley & Sons 379 pp Hardback
So, I do have something in common with Joel Greenblatt. I’d rather it was investment talent but, as the celebrated value investor writes in the foreword to David Einhorn’s Fooling Some of the People All of the Time, “I read this book in two sittings. If eating and sleeping hadn’t gotten in the way, it would have been one.”
Fooling Some of the People All of the Time can, according to one’s interest and frame of mind, be read on several levels. As beach reading, the subtle interpolation of the sometimes arcane detail of financial weaponry into a relentless plot has more than a touch of Tom Clancy. As an investment tome, it’s a reminder that even the most intensive research and being right on the facts doesn’t mean a position is going to be particularly, let alone spectacularly, profitable.
And as a parable of the ills that beset the U.S.? Einhorn does not make so bold—he admits to only having written the book to document the wrongdoing of his long-time piñata Allied Capital (ALD) and expose regulatory indifference (at best) —but it’s all here: squandered treasure; richly-rewarded dishonesty; bureaucratic misfeasance touching most points on the arc from blithering incompetence through smug inertia to outright venality; and inquisitors’ cannons spiked by a strategic campaign contribution. Or two.
The broad strokes of Einhorn’s dalliance with Allied Capital are by now well known.
He began shorting the business development company in 2002. Deploying resources available only to the most successful investors, he uncovered wells of skullduggery still being tapped today. For his trouble, he’s been investigated by the US Securities and Exchange Commission, ignored by the Small Business Administration, and had his phone records stolen in a pre-texting attack that predated the Hewlett-Packard scandal. Oh, and he got his wife, the journalist Cheryl Strauss Einhorn, fired from Barron’s after 10 years there as a writer and editor.
“It was a bad few days,” Einhorn writes. I bet.
Meanwhile, Allied Capital has carried on cheating, pretty much regardless. It said, despite overwhelming evidence to the contrary, that criminal behavior exposed at a subsidiary’s Detroit office was the work of a few rogue individuals. It settled an investigation of its accounting practices without admitting or denying the findings, with the SEC deciding it needn’t bother fining or otherwise sanctioning the company.
Putting aside the fact that he’s turned out a near 400-page book on the experience, Einhorn appears to have retained his perspective. Despite the totally undeserved aggravation, his tone throughout, as it was in his more recent encounter with Lehman Bros (LEH), where his thorough humiliation of chief financial officer Erin Callan forced her departure, is cool, professional, even surgical, and entirely fact-based.
But perhaps the book’s most useful lesson, in a world where hedge funds get the blame for pretty much any financial market disruption anywhere, is about how the best go about their work. Hard work, detailed work, and doubtless for every Allied Capital or MBIA (MBI) or Lehman (LEH) project that bears fruit are a dozen more that don’t go anywhere, and a few more that don’t work out quite as planned (New Century q.v.).
The credit implosion has taken its toll on Allied Capital; its stock, which traded in the low $30s through most of 2007, is now in the sub-teens and sporting the sort of unsustainable yield — 20 per cent — normally associated with junk bonds heading from mob-controlled landfill to Superfund toxicity. But still the sleaze, and the denial, carries on.
As recently as Sunday, Aug. 3, The New York Times’ Gretchen Morgenson reported that a scathing 2007 audit of the Small Business Administration’s oversight of one of its top private lenders remains — yep, the Allied Capital subsidiary Business Loan Express — remains hidden from view. And why?
Also under wraps in the public report was SBA management’s view that it should not suspend BLX’s preferred lending because that would “immediately put BLX out of business.”
Which, speaking as a taxpayer in these here United States, would be a damn good start.
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This article has 32 comments:
These comments sound very much like those written by the management of Allied Capital over the years.
I'm with Einhorn.
So, where did ALD get the cash to pay the dividend. They claim it was from income earned during 2007. But the truth is - they probably got it from the sale of new stock shares during 2008.
Also, recognize that the 25.7 cents per share in earnings doesn't take into account the unrealized depreciation (i.e losses in current portfolio value) of 83 cents per share during the quarter. Since their portfolio is supposedly kept to maturity, these losses will not be completely realized. But, even if only a third of the losses are realized (a conservative estimate), ALD actually lost 2 cents per share during the quarter.
But they still paid 65 cents in "dividends."
Also, never forget that shorts have to pay the dividends. Those short since 2002 have actually LOST more, after the dividends thay have paid out. I invite ALD Management todeclare a $ 5 special dividend, to blow the shorts out of the water, one and for all.
Ponzis take a while to play out. With high-level connections to an undermanned SEC, even longer... doesn't change anything material. It's fraud.
As one of the posters noted, ALD has been in business 50 years, which is a long time for a true Ponzi scheme.
Nevertheless, Einhorn is right about the current management. (i.e. Walton.) ALD made a lot of poor loans and didn't accurately report their unrealized losses until recently, and managment skimmed a lot of Allied's profits for themselves.
ALD does have some strengths - namely the deal with General Electric - and aren't likely to go bankrupt. But I believe that they will have to significantly reduce their dividend payout after the first quarter of next year and the stock price will decline dramatically.
If you want to see what happens when a BDC loses its ability to make dividend payments, take a look at MCGC. If you have to own ALD, make sure you get out before next April.
[There is only one case where it makes any sense: the stock has gotten insanely high. Selling stock looks like free money, so managements sells a bunch, now has plenty of cash to maintain a dividend. Very rare, and of course, not good for the fools who buy the new shares. ]
Wow! Game, set, match.
The book is being "rehashed" because its the most visible and best explained example of the Bush Administration's incompetence in regulating the stock market. These idealogues believe in the "invisible hand of the market" so much that they can't tell when the hand is giving "retail" investors the middle finger.
The worse the other people fare, the better they are off.
who'd like to be a bull.
But how can I,
when pigs run the show?</i>
By pigs, I mean fractional-reserve bankers.
<<The book is being "rehashed" because its the most visible and best explained example of the Bush Administration's incompetence in regulating the stock market. These idealogues believe in the "invisible hand of the market" so much that they can't tell when the hand is giving "retail" investors the middle finger.
But I do agree that Walton has made some bad investment decisions and Walton and other executives have paid themselves too much in salaries, bonuses, stock options, etc.
I think the BDC's are in for trouble but with prudent management, ALD, ACAS, MCGC will survive.
Long ACAS and MCGC. no position in ALD.
Also, Naked short selling is illegal according to writers on SA. As the SEC enforces the laws on naked short selling then ALD, ACAS, and MCGC common shares should rise.
Finally, I would make short selling illegal too. And I would increase margin requirements on trading commodity futures contracts to 50% for six month and then to 70% and make it illegal for hedge funds and pension funds to invest ( ie. speculate ) in commodities.
On 2008 Dec 20 12:37 PM Koolmogul wrote:
> Over my career as a cynical financial executive I picked up a few
> bits of wisdom from some of the folks I worked with. One was "You've
> got to believe SOMETHING". I choose to believe that the SEC knows
> what they are doing and that Einhorn is a crook who deserves to be
> put in the slammer. If there was anything wrong at Allied they would
> have been fined.